Hedge Fund Regulation: The nose of the camel under the tent

   Beginning in February, the Securities and Exchange Commission will require those who advise hedge funds to register o a Form ADV.  The form asks for the advisers address and his or her professional history.  The SEC has the discretion to audit any registered fund.  I have written the this is the proverbial "camel nose under the edge of the tent." Post  When any registered hedge fund is in trouble, political pressure will mount on the SEC, questioning why, for example, the SEC did not audit the fund, and the SEC will be forced to adopt more detailed registration requirements in response to the pressure.  The inevitable result is more hedge fund regulation, growing over time after each new hedge fund collapse or scandal. 

In a sense, I was wrong in the earlier post, however:  I assumed the pressure would attach after registration next February, but the political pressure to augument registration requirements has started already, even before the registration rules have taken effect!   

Jenny Anderson, In "Insider: A Modest Proposal to Prevent Hedge Fund Fraud", in today's NYT Business Section at C6, reflecting on the collapse of Bayou Group, writes that that SEC should, in reaction to the scandal, ask for more hedge fund information, the name of the fund's auditor and the name of the fund's broker/dealer.  Her argument is circular:  With these new disclosure requirements the SEC could protect itself form politicians who want greater disclosure requirements.   In other words, increase the regulations to fend off demands to increase the regulations.  The SEC will no doubt comply:  Asking the SEC to regulate more is like asking a barber whether you need a haircut.   With each crisis, the push on the SEC to increase registration requirements, coupled with the SEC's self-confidence that it can regulate in the public's increase will inevitably increase the intrusiveness of hedge fund regulations.  Within five years will we will have in place a full Regulation HF (Hedge Fund).